===========================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------
FORM 10-Q
------------------
For Quarter Ended September 30, 1998
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
COMMISSION FILE NO. 1-4474
--------------------------
OAK INDUSTRIES INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 36-1569000
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification Number)
1000 WINTER STREET
WALTHAM, MASSACHUSETTS 02451
(Address of principal executive offices)
(781) 890-0400
(Registrant's telephone number)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes /X / No / /
Indicate number of shares outstanding of each of the issuer's classes of
Common Stock, as of the latest practicable date.
As of November 9, 1998, the Company had outstanding 17,593,710 shares of
Common Stock, $0.01 par value per share.
===========================================================================
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
CONSOLIDATED CONDENSED BALANCE SHEET
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
December 31, 1997 September 30, 1998
--------------------- ---------------------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................... $ 8,642 $ 9,431
Receivables, less reserves................. 47,036 51,052
Inventories:
Raw materials........................... 14,153 20,907
Work in process......................... 28,852 29,212
Finished goods.......................... 8,292 51,297 11,362 61,481
------- -------
Deferred income taxes...................... 16,143 11,709
Other current assets....................... 2,488 2,733
--------- ---------
Total current assets................. 125,606 136,406
Plant and equipment, at cost.................. 159,351 166,544
Less - accumulated depreciation............... (89,926) 69,425 (95,942) 70,602
------- -------
Deferred income taxes......................... 775 622
Goodwill and other intangible assets, less
accumulated amortization of
$17,239 and $21,799........................ 178,577 174,039
Investment in affiliates...................... 8,358 9,496
Other assets.................................. 5,049 9,023
--------- ---------
Total assets......................... $ 387,790 $ 400,188
========= =========
Liabilities and stockholders' equity
Current liabilities:
Current portion of long-term debt.......... $ 443 $ 478
Accounts payable........................... 11,128 17,694
Accrued liabilities........................ 29,217 25,674
--------- ---------
Total current liabilities............ 40,788 43,846
Other liabilities............................. 8,429 7,154
Long-term debt, less current maturities:
Revolving credit facility................. 149,000 44,000
4 7/8% Convertible subordinated notes..... -- 100,000
Other..................................... 2,465 151,465 2,299 146,299
------- -------
Minority interest............................. 4,954 4,697
Stockholders' equity:
Common stock............................... 190 192
Additional paid-in capital................. 305,740 312,608
Accumulated deficit........................ (97,956) (76,144)
Unearned compensation - restricted stock... (1,754) (1,212)
Treasury stock............................. (22,092) (35,414)
Other...................................... (1,974) 182,154 (1,838) 198,192
------- --------- ------- ---------
Total liabilities and
stockholders' equity............... $ 387,790 $ 400,188
========= =========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
<PAGE>
CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
---------------------- ----------------------
1997 1998 1997 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales..................................... $ 76,975 $ 81,627 $ 230,323 $ 249,503
Cost of sales................................. (48,373) (51,455) (145,852) (155,624)
-------- -------- --------- ---------
Gross profit.................................. 28,602 30,172 84,471 93,879
Selling, general and administrative
expenses.................................. (16,492) (16,551) (51,118) (53,335)
-------- -------- --------- ---------
Operating income.............................. 12,110 13,621 33,353 40,544
Interest expense.............................. (2,718) (2,219) (7,966) (7,084)
Interest income............................... 93 553 232 867
Equity in net income of affiliated companies.. 17 385 61 1,820
-------- -------- --------- ---------
Income before income taxes and minority
interest................................... 9,502 12,340 25,680 36,147
Income tax provision.......................... (3,382) (4,689) (9,624) (13,736)
Minority interest in net income of
subsidiaries.............................. (296) (247) (844) (599)
-------- -------- --------- ---------
Net income.................................... $ 5,824 $ 7,404 $ 15,212 $ 21,812
======== ======== ========= =========
Income per share - basic
Net income.............................. $ .33 $ .41 $ .85 $ 1.22
======== ======== ========= =========
Weighted average number of shares
outstanding - basic........................ 17,721 17,973 17,844 17,870
======== ======== ========= =========
Income per share - diluted
Net income.............................. $ .32 $ .39 $ .84 $ 1.15
======== ======== ========= =========
Weighted average number of shares
outstanding - diluted...................... 18,149 21,251 18,193 20,625
======== ======== ========= =========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
<PAGE>
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
For the Nine Months
Ended September 30,
----------------------
1997 1998
-------- --------
<S> <C> <C>
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS FROM:
Operating activities:
Net income................................................. $ 15,212 $ 21,812
Adjustments to reconcile net income to net cash
provided by operations:
Depreciation......................................... 9,278 10,347
Amortization......................................... 4,981 5,557
Minority interest.................................... 844 599
Gain on the sale of securities....................... -- (356)
Gain on the sale of properties....................... (253) --
Undistributed earnings of affiliated companies....... (61) (923)
Changes in assets and liabilities, net of
effects from acquisition of businesses:
Receivables....................................... (9,362) (4,226)
Inventories....................................... 3,833 (10,184)
Accounts payable and accrued liabilities.......... (4,148) 5,096
Other............................................. 8,263 3,180
--------- ---------
Net cash provided by operations............................... 28,587 30,902
--------- ---------
Investing activities:
Capital expenditures....................................... (11,138) (12,147)
Acquisition of business.................................... (21,118) (1,000)
Proceeds from the sale of properties....................... 1,924 --
Other...................................................... 4 319
--------- ---------
Net cash used in investing activities......................... (30,328) (12,828)
--------- ---------
Financing activities:
Long-term borrowings....................................... 49,287 118,234
Repayment of borrowings.................................... (31,695) (123,365)
Stock repurchases.......................................... (20,544) (13,808)
Exercise of stock options.................................. 7,243 6,104
Dividends paid to minority stockholders.................... (1,545) (856)
Deferred debt issuance costs............................... -- (3,342)
Other...................................................... (115) (396)
--------- ---------
Net cash provided by (used in) financing activities........... 2,631 (17,429)
--------- ---------
Effect of exchange rate changes on cash and cash equivalents.. (449) 144
--------- ---------
Cash and cash equivalents:
Net change during the period............................... 441 789
Balance, beginning of period............................... 6,116 8,642
--------- ---------
Balance, end of period..................................... $ 6,557 $ 9,431
========= =========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
<PAGE>
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1. The consolidated condensed financial statements have been prepared by
Oak Industries Inc. (the "Company") without audit, pursuant to the rules
and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations. The Company believes that the disclosures made in this report
are adequate to make the information presented not misleading. It is
suggested that these consolidated condensed financial statements be read in
conjunction with the financial statements and the notes thereto included in
the Company's latest annual report on Form 10-K. In the opinion of the
Company, all adjustments, consisting only of normal recurring adjustments,
necessary to present fairly the financial position of the Company and its
consolidated subsidiaries as of December 31, 1997 and September 30, 1998,
and the results of their operations and cash flows for the three and nine
month periods ending September 30, 1997 and 1998 have been included. The
results of operations for such interim periods are not necessarily
indicative of the results for the full year.
2. On February 25, 1998, the Company issued $100 million of 4 7/8%
convertible subordinated notes due 2008 (the "Notes"). The Notes are
convertible into common stock of the Company at a conversion price of
$38.66 per share. Interest on the Notes is payable semi-annually in
arrears on each March 1 and September 1, and the first interest payment was
made on September 1, 1998. The net proceeds from the sale of the Notes
were used to reduce borrowings under the Company's $300 million revolving
credit facility.
3. The Company paid interest on debt for the three months ended September
30, 1997 and 1998 in the amounts of $2.7 million and $3.2 million,
respectively, and for the nine months ended September 30, 1997 and 1998 in
the amounts of $7.7 million and $6.2 million, respectively. Income taxes
paid during the three months ended September 30, 1997 and 1998 were $0.9
million and $1.7 million, respectively, and the nine months ended September
30, 1997 and 1998 were $2.3 million and $8.6 million, respectively.
4. The following represents a reconciliation of the net income and
weighted average number of shares used in the basic and diluted earnings
per share computations (in thousands, except per share data):
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
1997 1998 1997 1998
------ ------ ------ ------
<S> <C> <C> <C> <C>
Basic
Net income..................................... $ 5,824 $ 7,404 $ 15,212 $ 21,812
Weighted average shares outstanding............ 17,721 17,973 17,844 17,870
Net income per share........................... $ .33 $ .41 $ .85 $ 1.22
======== ======== ========= ========
Diluted
Net income..................................... $ 5,824 $ 7,404 $ 15,212 $ 21,812
Interest expense and amortization of deferred
costs, net of tax, related to 4 7/8%
convertible subordinated notes.............. -- 807 -- 1,934
-------- -------- --------- --------
Net income as adjusted......................... $ 5,824 $ 8,211 $ 15,212 $ 23,746
Weighted average shares:
Outstanding................................. 17,721 17,973 17,844 17,870
Incremental shares related to 4 7/8%
convertible subordinated notes............ -- 2,587 -- 2,070
Incremental shares related to other common
stock equivalents........................ 428 691 349 685
-------- -------- --------- --------
Total shares outstanding, as adjusted.......... 18,149 21,251 18,193 20,625
Net income per share........................... $ .32 $ .39 $ .84 $ 1.15
======== ======== ========= ========
</TABLE>
5. Certain items in the 1997 financial statements have been reclassified
to conform with 1998 presentation.
6. In the first quarter of 1998, the Company adopted Statement of
Financial Accounting Standards No. 130 ("SFAS No. 130"), "Reporting
Comprehensive Income." This statement requires disclosure of comprehensive
income and its components in interim and annual reports. Comprehensive
income includes all changes in stockholders' equity during a period except
those resulting from investments by stockholders and distributions to
stockholders. Accordingly, the components of comprehensive income include
net income, cumulative translation adjustments and unrealized gains and
losses on available-for-sale securities. For the three months ended
September 30, 1997 and 1998, foreign currency translation adjustments
resulted in a loss of $0.10 million and a gain of $0.58 million,
respectively. For the nine months ended September 30, 1997 and 1998,
foreign currency translation adjustments resulted in a loss of $1.08
million and a gain of $0.32 million, respectively. There were no
unrealized gains or losses on available-for-sale securities for the three
and nine months ended September 30, 1997 and 1998.
7. Subsequent events:
On October 30, 1998, the Company acquired Tele Quarz GmbH, a
manufacturer of frequency control products located in Neckarbischofsheim,
Germany. The acquisition is being accounted for as a purchase. The
acquisition was financed with borrowings from the Company's revolving
credit facility. The purchase price was approximately $65 million and
included the refinancing and assumption of certain indebtedness at Tele
Quarz.
On October 30, 1998, the Company purchased equity interests totalling
3.75% of Gilbert Engineering Co., Inc. ("Gilbert") held by certain former
and present members of the management of Gilbert. The Company paid
approximately $11.4 million in cash. The purchase price was financed with
borrowings from the Company's revolving credit facility. The Company now
owns 100% of Gilbert.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THIRD QUARTER RESULTS OF OPERATIONS
SUMMARY
Net sales increased 6% to $81.6 million in the third quarter of 1998
from $77.0 million in the third quarter of 1997, mainly as a result of
increased sales in the communications components group. Net income
increased to $7.4 million in the third quarter of 1998 from $5.8 million in
the third quarter of 1997, primarily due to increased operating income in
the communications components group.
SALES
The Company's communications components sales increased 14% in the third
quarter of 1998 compared to sales in the same period in 1997. This growth
was primarily the result of increased sales at Gilbert and at the Oak
Frequency Control Group ("OFCG"). The sales growth at Gilbert was mainly
the result of increased sales to domestic CATV customers. Sales growth at
OFCG resulted from increased sales to wireless and telecommunications
customers. During the third quarter of 1998, sales at Lasertron, Inc.
("Lasertron") declined versus sales in the comparable prior-year period.
This decline was the result of reduced sales to one European customer that
were only partially offset by increases in sales to other customers.
Sales of the controls components group decreased 11% during the third
quarter of 1998 versus sales in the comparable prior-year period, primarily
due to a reduction in sales of components used in a government postal
sorting system. Sales of gas controls during the third quarter of 1998
increased slightly compared to sales during the third quarter of 1997.
GROSS PROFIT
Gross profit margin for the third quarter of 1998 was 37.0% compared to
37.2% during the third quarter of 1997. Gross profit margin in the
communications components group declined slightly compared to gross profit
margin in the third quarter of 1997, primarily as a result of reduced sales
volume at Lasertron. During the third quarter of 1998, Gilbert and OFCG
gross profit margins improved versus gross profit margins in the comparable
prior-year period. The communications components group gross profit margin
for the third quarter of 1998 included a favorable impact of $0.8 million
from the resolution of certain customer issues related to prior periods.
Gross profit margin at the controls components group declined slightly
compared to the gross profit margin in the third quarter of 1997.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased slightly to $16.6
million during the third quarter of 1998 from $16.5 million of such
expenses during the third quarter of 1997. Selling, general and
administrative expenses declined to 20.3% of sales in the third quarter of
1998 compared to 21.4% in the third quarter of 1997.
INTEREST EXPENSE
Interest expense decreased to $2.2 million during the third quarter of
1998 from $2.7 million during the third quarter of 1997. The decrease
primarily resulted from a lower effective interest rate on outstanding
borrowings in the third quarter of 1998 compared to the effective rate in
the third quarter of 1997. The lower effective interest rate was due to
the issuance in 1998 of the Notes, the proceeds of which were used to
reduce higher-cost borrowings under the Company's revolving credit
facility.
INTEREST INCOME
Interest income for the third quarter of 1998 was $0.6 million compared
to interest income of $0.1 million during the third quarter of 1997. The
increase resulted primarily from a $0.4 million gain on the sale of
securities that was reported as interest income during the third quarter of
1998.
INCOME TAXES
The effective income tax rate for financial reporting purposes for the
third quarter of 1998 was 38.0%. The tax rate for the third quarter of
1997 was 35.6%. The tax rate for the third quarter of 1997 reflected a
favorable impact from the resolution of an outstanding tax matter.
EQUITY IN NET INCOME OF AFFILIATED COMPANIES
Equity in net income of affiliated companies was $0.39 million for the
third quarter of 1998 compared to $0.02 million in the comparable prior-
year period. This increase resulted primarily from an increase in net
income of Wuhan Telecommunication Devices Co. ("WTD"), the Company's joint
venture that manufactures fiber-optic components in China. The increase in
net income at WTD resulted from a significant increase in sales.
MINORITY INTEREST IN NET INCOME OF SUBSIDIARIES
Minority interest in net income of subsidiaries during the third quarter
of 1998 decreased to $0.2 million from $0.3 million in the third quarter of
1997. During the third quarter of 1998, minority stockholders owned 3.75%
of Gilbert compared to 7.5% during the third quarter of 1997.
NINE MONTHS RESULTS OF OPERATIONS
SUMMARY
Net sales increased 8% to $249.5 million in the first nine months of
1998 from $230.3 million in the first nine months of 1997, mainly as a
result of increased sales in the communications components group. Net
income increased to $21.8 million in the first nine months of 1998 from
$15.2 million in the first nine months of 1997, primarily due to increased
operating income in the communications components group.
SALES
The Company's communications components sales increased 14% in the first
nine months of 1998 compared to sales in the same period in 1997. This
growth was the result of significant sales increases at OFCG and Gilbert.
During the first nine months of 1998, sales at Lasertron declined slightly
compared to the sales in the comparable prior-year period.
Sales at the controls components group during the first nine months of
1998 decreased 4% compared to sales in the first nine months of 1997. This
was the net result of a moderate increase in sales of gas controls offset
by a reduction in sales of components used in a government postal sorting
system.
GROSS PROFIT
Gross profit margin for the first nine months of 1998 was 37.6% compared
to 36.7% during the first nine months of 1997. In the communications
components group, gross margin improvements during the first nine months of
1998 at Gilbert and OFCG more than offset a slight decline in gross profit
margin at Lasertron. Gross profit margin also improved slightly in the
controls components group during the first nine months of 1998 compared to
gross profit margin in the first nine months of 1997.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased to $53.3 million
during the first nine months of 1998 compared to $51.1 million of such
expenses during the first nine months of 1997. Selling, general and
administrative expenses decreased to 21.4% of sales for the first nine
months of 1998 compared to 22.2% during the first nine months of 1997.
During the first nine months of 1998, the Company received $0.5 million
of royalty income related to 1997 activities. The Company reports royalty
income as an offset to selling, general and administrative expenses. No
royalty income was reported during the first nine months of 1997.
INTEREST EXPENSE
Interest expense decreased to $7.1 million during the first nine months
of 1998 from $8.0 million during the first nine months of 1997. The
decrease resulted primarily from a lower effective interest rate on
outstanding borrowings in the first nine months of 1998 compared to the
effective rate on borrowings during the comparable prior-year period. The
lower effective interest rate was due to the issuance in 1998 of the Notes,
the proceeds of which were used to reduce higher-cost borrowings under the
Company's revolving credit facility.
INCOME TAXES
The effective income tax rate for financial reporting purposes for the
first nine months of 1998 was 38.0%. The tax rate for the comparable
prior-year period was 37.5%.
EQUITY IN NET INCOME OF AFFILIATED COMPANIES
Equity in net income of affiliated companies was $1.82 million for the
first nine months of 1998 compared to $0.06 million in the comparable
prior-year period. This was the result of increased net income from higher
sales at WTD, and from a gain during the first quarter of 1998 from the
Company's sale to its joint-venture partner of the Company's interest in a
joint venture that manufactured quartz crystal blanks in Venezuela.
MINORITY INTEREST IN NET INCOME OF SUBSIDIARIES
Minority interest in net income of subsidiaries during the first nine
months of 1998 decreased to $0.6 million from $0.8 million in the first
nine months of 1997. Minority shareholders owned 3.75% of Gilbert during
the first nine months of 1998 compared to 7.5% during the first nine months
of 1997.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operations for the first nine months of 1998 was
$30.9 million compared to $28.6 million for the first nine months of 1997.
This increase resulted in large part from higher net income during 1998.
Capital expenditures for the first nine months of 1998 were $12.1
million compared to $11.1 million of such expenditures in the first nine
months of 1997. Capital expenditures during the first nine months of 1998
were mainly for equipment for capacity expansion and new products.
The Company was authorized in December of 1996 to purchase up to $50
million of shares of its stock on the open market. In October 1998, this
program was amended to allow stock repurchases not to exceed $75 million in
aggregate. During the third quarter of 1998, the Company paid $13.8
million to repurchase 515,800 shares of its stock. To date, the Company
has spent a total of $35.1 million to repurchase 1,602,200 shares of stock
under its repurchase program.
The Company believes that its existing cash balance, the funds generated
by its operations, and its revolving credit facility will be sufficient to
fund the Company's ongoing operations for the foreseeable future.
YEAR 2000 COMPLIANCE
BACKGROUND
"Year 2000" issues may arise because many existing computer programs use
only the last two of the four digits that identify a year. Therefore,
certain computer programs may not properly recognize a year that begins
with "20" and these programs may not function correctly once dates
beginning with "20" start being used.
The Company is aware of the Year 2000 issue and the potential associated
business and financial risks to which the Company is exposed. The Company
completed an initial internal assessment of the Year 2000 impact on each of
its operating facilities during 1997. As a result of this internal
assessment, the Company initiated corrective actions at several of its
operating facilities. During the second quarter of 1998, qualified
external consultants performed a more detailed assessment of the impact of
the Year 2000 on the Company's major operating facilities. This assessment
included a review of existing corrective action plans and recommendations
for additional corrective actions. The cost of this external assessment
was approximately $0.1 million.
Based on the foregoing assessments, the Company believes that Year 2000
issues at its operating facilities should not have a material impact on its
financial or operating performance. However, pending completion of all
necessary corrective actions, it is not possible for the Company to
determine the extent of any difficulty it might experience at its operating
facilities as a result of Year 2000 issues. Such problems, or similar
problems at the Company's customers or suppliers, could temporarily affect
the Company's performance adversely.
CORRECTIVE ACTION STATUS
PERSONAL COMPUTERS AND LOCAL AREA NETWORKS:
Each of the Company's sixteen domestic and foreign operating facilities
uses personal computers and networking hardware and software. The external
assessment completed during the second quarter of 1998 identified required
upgrades and provided information on the steps necessary to upgrade
hardware and software. Each operating facility is upgrading its hardware
and software, where necessary, to ensure personal computers and local area
networks are Year 2000 compliant. Many of the required upgrades would have
been made to keep pace with technological improvements even were they not
required for Year 2000 compliance, and had been provided for in each
operating facility's annual budget for capital expenditures and selling,
general and administrative expenses. All required upgrades are expected to
be completed by the second quarter of 1999. The total cost for these
upgrades is estimated to be approximately $0.5 million to $1.0 million.
This figure includes amounts for capital equipment and amounts to be
charged to selling, general and administrative expenses.
BUSINESS SYSTEMS:
The term "Business Systems" includes the systems used in materials
requirements planning, manufacturing and materials control, general ledger
and other financial systems, order entry and customer activity tracking.
There is a wide variety of hardware and software used in the Company's
Business Systems; some of the Company's operating facilities have Business
Systems that have been developed, in part, "in-house." The systems have
been evaluated at each of the operating facilities and categorized as
follows:
1) Already Year 2000 compliant; no action required;
2) Software and/or hardware upgrade required; make necessary changes
to existing systems; or
3) Software and/or hardware upgrade required; replace existing system
with upgraded Year 2000 compliant system.
For existing systems that are to be revised to be brought into
compliance, Year 2000 program plans are in place and the majority of the
work has been completed. All remaining work is expected to be completed by
the second quarter of 1999. There is no significant incremental cost to
these efforts because the majority of the work is being performed by
internal management information systems personnel. These expenses are
reported as selling, general and administrative expenses as incurred.
At operating facilities where an existing system is being replaced with a
new system, program plans have been or will be established to ensure the
new systems are operational by the second quarter of 1999. These upgrades
are necessary investments for the operating facilities to keep pace with
technology and to enhance operational performance, in addition to being
required to ensure Year 2000 compliance.
The Company has focused the required resources on this area and
anticipates that all systems will be compliant by mid-1999. Approximately
$2.5 million in capital investment has been made to date for these systems
improvements. The Company has planned an additional $2.0 million to $2.5
in capital expenditures for upgrades still to be completed.
CORPORATE-WIDE SYSTEMS:
The Company's corporate-wide electronic mail system and the corporate
financial reporting system will be upgraded by the end of the first quarter
of 1999. These systems are being upgraded to improve operational
performance. The upgraded systems will be Year 2000 compliant. The cost
for these upgrades is approximately $1.0 million, including capitalized
amounts and selling, general and administrative expenses.
OTHER:
The Company has also identified certain corrective actions necessary to
ensure other computer-dependent equipment is Year 2000 compliant. This
equipment includes telephone systems and computer-controlled manufacturing
equipment. The Company believes that only minor efforts are required in
these areas to ensure Year 2000 compliance.
FUNDING FOR REQUIRED CORRECTIVE ACTIONS
The Company believes it has budgeted sufficient funds to ensure all
required corrective actions are completed in time to avoid Year 2000
problems. The Company does not believe that costs required to address its
Year 2000 issues at its operating facilities will have a material financial
impact.
YEAR 2000 COMPLIANCE OF SUPPLIERS AND CUSTOMERS
The Company has begun to survey selected suppliers, customers and
service providers that are material to the Company's business to ensure
they are Year 2000 compliant, and will complete this process by mid-1999.
Where practicable, the Company will attempt to mitigate its risks with
respect to the failure of suppliers to be Year 2000 compliant. In the
event that certain suppliers indicate that they will not be Year 2000
compliant, and this non-compliance is expected to result in failure to meet
the Company's requirements, the Company will seek alternative suppliers.
However, such failures could temporarily affect the Company's operations.
PRODUCTS
The products produced by the Company do not include date references that
could be affected by the Year 2000 issue, therefore the Company does not
believe there is a material risk of additional warranty claims related to
the Year 2000 issue.
RISKS
If certain of the Company's systems fail to be brought into Year 2000
compliance, the most likely worst-case scenario would be a temporary
disruption of operations during the implementation of alternative manual
systems. The Company believes the impact of such a temporary disruption
would not be material.
CONTINGENCY PLANS
The Company has not yet developed formal contingency plans to address
the possibility that its planned corrective actions may not achieve Year
2000 compliance. The Company will consider the need for such contingency
plans as it continues to assess the Year 2000 risk and monitors the
progress of its corrective action plans.
RECENTLY ENACTED ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 131 ("SFAS No. 131"),
"Disclosure About Segments of an Enterprise and Related Information"
requires public companies to report certain information about their
operating segments in their annual financial statements and quarterly
reports issued to stockholders. It also requires public companies to
report certain information about their products and services, the
geographic areas in which they operate, and their major customers. The
Company is required to adopt this statement in the fourth quarter of 1998.
Implementation of SFAS No. 131 will have no effect on the Company's
financial position or results of operations. The Company is assessing the
financial statement footnote disclosure impact of SFAS No. 131.
In April 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 132 ("SFAS No. 132"),
"Employer's Disclosures about Pensions and Other Postretirement Benefits."
SFAS No. 132 revises disclosure requirements for pension and other
postretirement benefit plans. The Company is required to adopt this
statement in the fourth quarter of 1998. Implementation of SFAS No. 132
will have no impact on the Company's financial position or results of
operations.
In June 1998, the FASB issued Statement of Financial Accounting
Standards No. 133 ("SFAS No. 133"), "Accounting for Derivative Instruments
and for Hedging Activities." SFAS No. 133 requires companies to record
derivatives on the balance sheet as assets or liabilities, measured at fair
value. Gains or losses resulting from the changes in the values of those
derivatives would be accounted for depending on the use of the derivatives
and whether they qualify for hedge accounting. The requirements of this
statement are to be adopted by the Company in the first quarter of 2000.
The Company is assessing the impact of SFAS No. 133 on its financial
position and results of operations.
RISKS AND UNCERTAINTIES
Statements contained in Management's Discussion and Analysis of
Financial Condition and Results of Operations that are not statements of
historical fact may include forward looking statements within the meaning
of the Private Securities Litigation Reform Act of 1995, including, without
limitation, statements as to expectations, beliefs and strategies regarding
the future. It is important to note that actual results could differ
materially from such forward looking statements due to a number of factors,
including, among other things, the factors set forth below. The forward
looking statements should be considered in light of these factors.
A significant portion of the Company's revenues is attributable to sales
of components for building, maintaining and expanding the communications
infrastructure. These components are used primarily in cable, wireless and
wired telephony systems in the United States and internationally. The
amount of capital spending in these industries is affected by a variety of
factors, including general economic conditions, availability of financing,
government regulation, demand for the products and services offered by the
Company's customers and technological developments. A decrease in capital
spending for communications infrastructure could have a material adverse
effect on the Company's business, financial condition and results of
operations.
The communications industry is very competitive and is characterized by
rapid technological change, new product development, product obsolescence
and evolving product specifications. Additionally, price competition in
this market is intense with significant price erosion over the life cycle
of a product. The ability of the Company to compete successfully depends
on the continued introduction of new products and ongoing manufacturing
cost reduction. The Company believes that it will continue to see varying
degrees of price pressure across all product lines. These price pressures,
if not offset by cost reductions, could result in lower average gross
margins.
Certain of the Company's business units sell products to a concentrated
group of customers. The loss of, or reduced demand for products from, any
of the Company's major customers could have a material adverse effect on
the Company's business, financial condition and results of operations.
The Company's international operations are subject to a variety of
risks, including changes in policy by foreign governments, social
conditions such as civil unrest, and economic conditions including high
levels of inflation, fluctuation in the value of foreign currencies and
currency exchange rates and trade restrictions or prohibitions. Such
factors could adversely affect the Company's international operations and
have a material adverse effect on the Company's business, financial
condition and results of operations. In addition, although the Company's
direct sales to customers in Asia have historically been a small percentage
of total sales, the Company sells to customers that do business worldwide
and cannot predict how the businesses of these customers may be affected by
economic conditions in Asia or elsewhere.
The Company's subsidiaries currently buy a number of raw materials from
single sources. The failure of the subsidiaries to obtain sufficient raw
materials or components as required, or to develop alternative sources if
and as required in the future, could have a material adverse effect on the
Company's business, financial condition and results of operations.
The Company has completed an assessment of the impact of the Year 2000 on
computers and software at its operating units. This assessment included a
review of the Company's year 2000 readiness by qualified independent
consultants. The Company has identified a number of potential problems and
corrective actions required. Some of these actions have already been, and
others remain to be, completed. The Company believes that Year 2000 issues
at its facilities should not have a material impact on its financial or
operating performance. However, pending completion of all necessary
corrective actions, it is not possible for the Company to determine the
extent of any difficulty it might experience at its facilities as a result
of Year 2000 issues. Such problems, or similar problems at the Company's
customers or suppliers, could temporarily affect the Company's performance
adversely. See "Year 2000 Compliance" above.
The Company's operations are subject to a variety of laws, regulations
and licensing requirements, including governmental regulations relating to
the environment. In addition, various pending or threatened legal
proceedings by or against the Company or one or more of its subsidiaries
involve alleged breaches of contract, torts and miscellaneous other causes
of action. The Company does not currently believe that its compliance with
applicable regulations or any litigation against the Company will have a
material adverse effect on the Company. However, there can be no assurance
that future compliance efforts or litigation will not have a material
adverse effect on the Company's business, financial condition and results
of operations.
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Reference is made to the Company's Annual Report on Form 10-K for the
year ended December 31, 1997.
ITEM 2. CHANGES IN SECURITIES
On July 29, 1998 and August 3, 1998, the Company issued from its
Supplemental Retirement Income Plan (the "SRIP") 2,856 and 425 shares of
its common stock, respectively, to two departing employees. These shares
represented vested matching contributions made by the Company to the former
employees' SRIP accounts. These transactions were effected pursuant to
exemptions from registration under Section 4(2) of the Securities Act of
1933 as amended and the rules and regulations thereunder.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
Not applicable
ITEM 5. OTHER INFORMATION
Not applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit Index
(10.1) Fourth Amendment dated as of October 2, 1998 to the
Credit Agreement dated as of November 1, 1996 (the
"Credit Agreement") among Oak Industries Inc., the
lenders from time to time party thereto and The Chase
Manhattan Bank as administrative agent and issuing bank,
filed herewith.
(10.2) Fifth Amendment dated as of October 28, 1998 to the
Credit Agreement, filed herewith.
(27) Financial Data Schedule (Submitted only to the Securities
and Exchange Commission in electronic format for its
information only).
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the third quarter ended
September 30, 1998.
<PAGE>
OAK INDUSTRIES INC.
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
OAK INDUSTRIES INC.
Date: November 12, 1998 /s/ Coleman S. Hicks
Coleman S. Hicks
Senior Vice President and
Chief Financial Officer
<PAGE>
FOURTH AMENDMENT dated as of October 2, 1998 (this "Fourth
Amendment"), to the Credit Agreement referred to below among OAK INDUSTRIES
INC., a Delaware corporation (the "Borrower"), the lenders party hereto and
THE CHASE MANHATTAN BANK, a New York banking corporation, as administrative
agent for the Lenders (in such capacity, the "Administrative Agent").
A. The parties hereto have entered into a Credit Agreement dated as of
November 1, 1996 (as amended, the "Credit Agreement").
B. The Borrower has requested that certain terms of the Credit Agreement
be amended, and the Required Lenders are willing, on the terms and subject
to the conditions set forth below, to agree to amend the Credit Agreement
as provided herein.
C. Capitalized terms used and not otherwise defined herein shall have the
meanings assigned to them in the Credit Agreement.
In consideration of the premises and the agreements, provisions and
covenants herein contained, the parties hereto hereby agree, on the terms
and subject to the conditions set forth herein, as follows:
SECTION 1. Amendment of Section 2.22(a). The first sentence of Section
2.22(a) is hereby amended by inserting the words "or any Guarantor"
immediately following the words "for the account of the Borrower".
SECTION 2. Amendment of Section 6.01. Clauses (h) and (i) of Section 6.01
of the Credit Agreement are hereby amended to read in their entireties as
follows:
"(h) Indebtedness of Foreign Subsidiaries to persons that are not the
Borrower or Guarantors not in excess of $25,000,000 principal amount at any
time outstanding;
(i) Indebtedness of Foreign Subsidiaries to the Borrower or Guarantors;
and".
SECTION 3. Amendment of Section 6.04(g). Section 6.04(g) of the Credit
Agreement is hereby amended to read in its entirety as follows:
" (g) additional loans and advances from the Borrower or any Guarantor to
Foreign Subsidiaries in an aggregate principal amount outstanding at any
time not in excess of $100,000,000 minus the aggregate consideration paid
by the Borrower and the Subsidiaries after the date hereof in connection
with Permitted Other Acquisitions that relate to Foreign Subsidiaries;".
SECTION 4. Amendment of Section 6.05(c). Section 6.05(c) of the Credit
Agreement is hereby amended by deleting the reference to "$60,000,000" and
substituting in lieu thereof "$100,000,000".
SECTION 5. Amendment of Section 6.05(d). Section 6.05(d) of the Credit
Agreement is hereby amended to read in its entirety as follows:
" (d) the sale by the Borrower or any Subsidiary of the assets of or
Capital Stock in O/E/N/India Ltd., Harper-Wyman Company and OakGrigsby
Inc.; and".
SECTION 6. Amendment of Section 6.06(a)(iv). Section 6.06(a)(iv) of the
Credit Agreement is hereby amended to read in its entirety as follows:
"(iv) the Borrower may repurchase its common stock for aggregate
consideration paid by the Borrower not in excess of $75,000,000 for all
such purchases after the date of this Agreement".
SECTION 7. Representations and Warranties. The Borrower represents and
warrants to each of the Lenders and the Administrative Agent that:
(i) Before and after giving effect to this Fourth Amendment, the
representations and warranties set forth in Article III of the Credit
Agreement are true and correct in all material respects with the same
effect as if made on the date hereof, except to the extent such
representations and warranties expressly relate to an earlier date.
(ii) Before and after giving effect to this Fourth Amendment, no Event of
Default or Default has occurred and is continuing.
SECTION 8. Conditions to Effectiveness. This Fourth Amendment shall
become effective when the Administrative Agent shall have received
counterparts of this Fourth Amendment that, when taken together, bear the
signatures of the Borrower and the Required Lenders.
SECTION 9. Credit Agreement. Except as expressly set forth herein, this
Amendment shall not by implication or otherwise limit, impair, constitute a
Amendment of, or otherwise affect the rights and remedies of the Lenders
and the Administrative Agent under the Credit Agreement, or alter, modify,
amend or in any way affect any of the terms, conditions, obligations,
covenants or agreements contained in the Credit Agreement, all of which are
ratified and affirmed in all respects and shall continue in full force and
effect. This Amendment shall apply and be effective only with respect to
the provisions of the Credit Agreement specifically referred to herein.
SECTION 10. Applicable Law. THIS FOURTH AMENDMENT SHALL BE GOVERNED BY,
AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK.
SECTION 11. Counterparts. This Fourth Amendment may be executed in two or
more counterparts, each of which shall constitute an original but all of
which when taken together shall constitute but one contract. Delivery of an
executed counterpart of a signature page of this Fourth Amendment by
telecopy shall be effective as delivery of a manually executed counterpart
of this Fourth Amendment
SECTION 12. Expenses. The Borrower agrees to reimburse the Administrative
Agent for its out-of-pocket expenses in connection with this Fourth
Amendment, including the reasonable fees, charges and disbursements of
Cravath, Swaine and Moore, counsel for the Administrative Agent.
IN WITNESS WHEREOF, the parties hereto have caused this Fourth Amendment to
be duly executed by their respective authorized officers as of the day and
year first written above.
OAK INDUSTRIES INC.,
by
-------------------------
Name:
Title:
THE CHASE MANHATTAN BANK, individually and as
Administrative Agent,
by
-------------------------
Name:
Title:
ABN AMRO BANK N.V., Boston Branch,
by: ABN AMRO North America, Inc., as Agent
by
-------------------------
Name:
Title:
by
-------------------------
Name:
Title:
NATIONSBANK OF TEXAS, N.A.,
by
-------------------------
Name:
Title:
LTCB TRUST CO.,
by
-------------------------
Name:
Title:
THE ROYAL BANK OF SCOTLAND PLC - NEW YORK BRANCH,
by
-------------------------
Name:
Title:
BANKBOSTON, N.A. (f/k/a The First National Bank
of Boston),
by
-------------------------
Name:
Title:
BHF-BANK AKTIENGESELLSCHAFT,
by
-------------------------
Name:
Title:
by
-------------------------
Name:
Title:
MELLON BANK, N.A.,
by
-------------------------
Name:
Title:
FIRST UNION NATIONAL BANK (f/k/a/ First Union
National Bank of North Carolina),
by
-------------------------
Name:
Title:
FLEET NATIONAL BANK,
by
-------------------------
Name:
Title:
CREDIT LYONNAIS NEW YORK BRANCH,
by
-------------------------
Name:
Title:
<PAGE>
FIFTH AMENDMENT dated as of October 28, 1998
(this "Fifth Amendment"), to the Credit Agreement
referred to below among OAK INDUSTRIES INC., a
Delaware corporation (the "Borrower"), the lenders
party hereto and THE CHASE MANHATTAN BANK, a New York
banking corporation, as administrative agent for the
Lenders (in such capacity, the "Administrative Agent").
A. The parties hereto have entered into a Credit Agreement dated as
of November 1, 1996 (as amended, the "Credit Agreement").
B. The Borrower has requested that certain terms of the Credit
Agreement be amended, and the Required Lenders are willing on the terms and
subject to the conditions set forth below, to agree to amend the Credit
Agreement as provided herein.
C. Capitalized terms used and not otherwise defined herein shall have
the meanings assigned to them in the Credit Agreement.
In consideration of the premises and the agreements, provisions and
covenants herein contained, the parties hereto hereby agree, on the terms
and subject to the conditions set forth herein, as follows:
SECTION 1. Amendment of Section 1.01. Section 1.01 of the Credit
Agreement is hereby amended by adding the following defined terms in their
proper alphabetical order"
"Tele Quarz Acquisition" shall mean the acquisition by Foreign
Subsidiaries of the Borrower of Tele Quarz GmbH, a German company, and
certain related assets."
"Tele Quarz Vehicles" shall mean wholly owned German partnerships and
Oak German Holding GmbH, in any case created to finance the Tele Quarz
Acquisition."
SECTION 2. Amendment of Section 6.01. Clause (i) of Section 6.01 of
the Credit Agreement is hereby amended to read in its entirety as follows:
"(i) Indebtedness of Foreign Subsidiaries (i) to the Borrower, (ii)
to Guarantors or (iii) to the Tele Quarz Vehicles; and".
SECTION 3. Amendment of Section 6.04(g). Section 6.04(g) of the
Credit Agreement is hereby amended to read in its entirety as follows:
" (g) additional investments, loans and advances from the Borrower,
any Guarantor or the Tele Quarz Vehicles to Foreign Subsidiaries in an
aggregate principal amount outstanding at any time not in excess of (i)
$100,000,000 (determined without duplication on a consolidated basis) minus
(ii) the aggregate consideration paid by the Borrower and the Subsidiaries
after the date hereof in connection with Permitted Other Acquisitions that
relate to Foreign Subsidiaries provided that if the proceeds of such
additional investments, loans or advances are used as consideration in
connection with an acquisition permitted under Section 6.05(c), such
additional investments, loans or advances shall not be subtracted pursuant
to this clause (g)(ii);".
SECTION 4. Amendment of Section 6.05(c). The proviso to Section
6.05(c) of the Credit Agreement is hereby amended to read in its entirety
as follows:
" provided, however that the aggregate consideration paid under this
clause (c) after the date hereof for acquisitions of persons or all or a
substantial part of a person's assets that are not Guarantors shall not at
any time exceed (i) $100,000,000 minus (ii) the outstanding principal
amount of investments, loans and advances referred to in Section 6.04(g);
provided that if the proceeds of such additional investments, loans or
advances are used as consideration in connection with an acquisition
permitted under this Section 6.05(c), such additional investments, loans or
advances shall not be subtracted pursuant to this clause (c) (the foregoing
being collectively called "Permitted Other Acquisitions");".
SECTION 5. Representations and Warranties. The Borrower represents
and warrants to each of the Lenders and the Administrative Agent that:
(i) Before and after giving effect to this Fifth Amendment, the
representations and warranties set forth in Article III of the Credit
Agreement are true and correct in all material respects with the same
effect as if made on the date hereof, except to the extent such
representations and warranties expressly relate to an earlier date.
(ii) Before and after giving effect to this Fifth Amendment, no Event
of Default or Default has occurred and is continuing.
SECTION 6. Conditions to Effectiveness. This Fifth Amendment shall
become effective as of that date (the "Amendment Effective Date") when the
Administrative Agent shall have received counterparts of this Fifth
Amendment that, when taken together, bear the signatures of the Borrower
and the Required Lenders.
SECTION 7. Credit Agreement. Except as expressly set forth herein,
this Fifth Amendment shall not by implication or otherwise limit, impair,
constitute a Fifth Amendment of, or otherwise affect the rights and
remedies of the Lenders and the Administrative Agent under the Credit
Agreement, or alter, modify, amend or in any way affect any of the terms,
conditions, obligations, covenants or agreements contained in the Credit
Agreement, all of which are ratified and affirmed in all respects and shall
continue in full force and effect. This Fifth Amendment shall apply and be
effective only with respect to the provisions of the Credit Agreement
specifically referred to herein.
SECTION 8. Applicable Law. THIS FIFTH AMENDMENT SHALL BE GOVERNED
BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK.
SECTION 9. Counterparts. This Fifth Amendment may be executed in two
or more counterparts, each of which shall constitute an original but all of
which when taken together shall constitute but one contract. Delivery of an
executed counterpart of a signature page of this Fifth Amendment by
telecopy shall be effective as delivery of a manually executed counterpart
of this Fifth Amendment.
SECTION 10. Expenses. The Borrower agrees to reimburse the
Administrative Agent for its out-of-pocket expenses in connection with this
Fifth Amendment, including the reasonable fees, charges and disbursements
of Cravath, Swaine and Moore, counsel for the Administrative Agent.
IN WITNESS WHEREOF, the parties hereto have caused this Fifth
Amendment to be duly executed by their respective authorized officers as of
the day and year first written above.
OAK INDUSTRIES INC.,
by
-------------------------
Name:
Title:
THE CHASE MANHATTAN BANK, individually and as
Administrative Agent,
by
-------------------------
Name:
Title:
ABN AMRO BANK N.V., Boston Branch,
by: ABN AMRO North America, Inc., as Agent
by
-------------------------
Name:
Title:
by
-------------------------
Name:
Title:
NATIONSBANK OF TEXAS, N.A.,
by
-------------------------
Name:
Title:
LTCB TRUST CO.,
by
-------------------------
Name:
Title:
THE ROYAL BANK OF SCOTLAND PLC - NEW YORK BRANCH,
by
-------------------------
Name:
Title:
BANKBOSTON, N.A. (f/k/a The First National Bank
of Boston),
by
-------------------------
Name:
Title:
BHF-BANK AKTIENGESELLSCHAFT,
by
-------------------------
Name:
Title:
by
-------------------------
Name:
Title:
MELLON BANK, N.A.,
by
-------------------------
Name:
Title:
FIRST UNION NATIONAL BANK (f/k/a/ First Union
National Bank of North Carolina),
by
-------------------------
Name:
Title:
FLEET NATIONAL BANK,
by
-------------------------
Name:
Title:
CREDIT LYONNAIS NEW YORK BRANCH,
by
-------------------------
Name:
Title:
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-END> Sep-30-1998
<CASH> 9,431
<SECURITIES> 0
<RECEIVABLES> 51,052
<ALLOWANCES> 0
<INVENTORY> 61,481
<CURRENT-ASSETS> 136,406
<PP&E> 166,544
<DEPRECIATION> 95,942
<TOTAL-ASSETS> 400,188
<CURRENT-LIABILITIES> 43,846
<BONDS> 146,299
<COMMON> 192
0
0
<OTHER-SE> 198,000
<TOTAL-LIABILITY-AND-EQUITY> 400,188
<SALES> 249,503
<TOTAL-REVENUES> 249,503
<CGS> 155,624
<TOTAL-COSTS> 155,624
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,084
<INCOME-PRETAX> 36,147
<INCOME-TAX> 13,736
<INCOME-CONTINUING> 21,812
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 21,812
<EPS-PRIMARY> 1.22
<EPS-DILUTED> 1.15
</TABLE>
